One of President Donald Trump’s focal points during his campaign, as well as his first years in office, was renegotiating the United States participation North American Free Trade Agreement (NAFTA) and pulling out of the Trans-Pacific Partnership (TPP).
At the end of September of 2018, more than a year of negotiations, President Trump, Canadian Prime Minister Justin Trudeau, and former Mexican President Enrique Pena Nieto worked together to find a progressive solution to the 25-year-old agreement. Due to the significant changes that were made to the trade deal agreement (and the Mexico tariffs on US goods), some dubbing it as NAFTA2.0, the North American Free Trade Agreement will be referred to as the United States-Mexico-Canada Agreement (USMCA) by no later than 2020.
The Old North American Free Trade Agreement
In short, the NAFTA trade deal was an agreement created and executed in 1994 allowing materials and finished goods to travel in and out of Mexico, the United States and Canada tariff-free. Its purpose was to incorporate manufacturing in Mexico into a previous free trade agreement between Canada and the United States. Incorporating Mexico’s manufacturing abilities into this agreement created a trilateral trade bloc, and strengthened the North American manufacturing footprint. It also aimed to improve economic growth, via manufacturing production, for all three participating countries by increasing jobs, mitigating the trade deficit and eliminating trade tariffs.
What Will Change With The USMCA and Manufacturing in Mexico?
The projected start date of the USMCA will most likely be no later than 2020. The agreement has been approved by the leaders of all three nations. The next steps are to have all three countries individually approve it by their governing systems. In the United States groups have launched a “Pass USMCA Coalition” advocating for a quick approval process in the House of Representatives. NAFTA will remain in its place until USMCA active.Areas of the agreement that sought most changes were:
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Country of Origin Rules
One significant change you will see in the USMCA Rules of Origin and Origin Procedures for automotive parts used for passenger vehicles and heavy and light trucks. The trade agreement will increase the requirements of North American Content in 2020 according to the type of vehicle. So what does this mean for auto manufacturers in Mexico? They will now need to ensure that the auto parts they purchase meet the new and complex requirements established by the USMCA. Failure to adhere to these new regulations may disqualify the automobile as “originating”, which provides duty free treatment when they are exported to the U.S., Canada or Mexico.
Passenger Vehicles & Light Trucks
- These type of vehicles must meet a 66% North American content requirement to qualify as “originating”. This will increase each year until 2023 when the content requirement will reach 75%.
- Parts used in passenger vehicles and light truck must also meet content requirements for three categories: core parts, principal parts and complementary parts in order to receive duty free treatment. The North American Content Requirement (Regional Value Content) will rise to 73% and increase to 85% by 2023.
- Core Parts
- Includes certain: engines, engine parts, automobile bodies, gear boxes, drive axles, shock absorbers, lithium ion batteries and steering wheels
- North American Content required will increase from 73% in 2020
- By 2023, this will rise to 85%
- Principle Parts
- Certain tires, rear-view mirrors, hydraulic fluid pumps, compressors, air conditioners, electronic brake systems, clutches and shaft couplings and airbags
- The required North American content will increase to 70% in 2020 and 80% in 2023
- Complementary Parts
- Complimentary parts include certain: pipes, locks, catalytic converters, valves, electric motors, batteries, distributors and windshields wipers, defrosters & demisters.
- North American content (Regional Value Content) will rise to 65% in 2020 and then to 75% in 2023
Labor Value Content Requirements
With the intention of bringing more automotive manufacturing to North America, wages will increase to $16 per hour in the United States for 40-45% of the work being done on vehicles. Production activities that fall into this category are: cost of manufacturing, assembly, R&D, and IT. Mexico has also agreed to give workers the right to union representation, and other various labor protections to comply with the increase of automotive labor.
Food & Agriculture
Currently, Canada restricts dairy exports from the U.S. through tariff-rate quotas. Under the new trade agreement, Canada will introduce dairy policy changes that will allow access to its dairy market to United States farmers, ranchers, and agribusinesses. There are also measures to remove tariffs on products like pork and cheese.
The Congressional Research Service has a great summary of the USMCA Agricultural Provisions.
To learn more about USMAC and its effects on your manufacturing operations in Mexico, please contact North American Production Sharing.
View the full text of the United States-Mexico-Canada-Agreement